Recovery, with a Hero

"The recession is really over."

This was the verdict passed last week by Treasury Secretary C. Douglas Dillon. Both Dillon and Presidential Economic Adviser Walter W. Heller predicted that the gross national product, which stood just below $500 billion in the first quarter, would hit between $520 and $530 billion by year's end--a prediction very close to that made in the generally gloomy atmosphere of five months ago by FORTUNE.

The nation's businessmen agreed. Assembled in Manhattan for the annual meeting of the National Industrial Conference Board, nearly 1,000 top executives representing a cross section of U.S. industry found the economy rapidly improving. Despite a severe profit squeeze in many industries, said Republic Steel's President Thomas F. Patton, "the recovery in general business activity is more vigorous than most people anticipated."

From Washington, Commerce Secretary Luther W. Hodges weighed in with news that gave substance to the economists' projections: in April, new orders and sales of manufacturers' durable goods each rose 4% to the highest level in seven months. Even more significant, personal income rose $500 million in April to set a new high of $410.3 billion. The income rise, which took place chiefly through improved wages and salaries rather than through Government benefits, would have been even bigger ($2.3 billion) if the Administration had not artificially inflated the March rate by making early payment of $1.8 billion in G.I. insurance dividends.

The Stabilizer. Secretary Hodges' news pointed up the fact that personal income has become "the hero of recessions," tending to hold up the economy in times of stress when other indicators are falling. During three previous postwar recessions, personal income dipped substantially less, both absolutely and in percentages, than the gross national product (see chart). In the recession just over, it fell less than half as much as G.N.P.

What is behind personal income's growing stability? Though each recession has been marked by a fairly sharp decline in income resulting from current production (3% in the 1960 recession), that fall is usually balanced by other factors. People still continue to collect about the same dividends and interest. Benefit payments, such as unemployment compensation and old-age pensions (laid-off oldsters frequently retire), always increase during a recession. They rose from $27.7 billion to $31.1 billion in the year up to February 1961. The level of personal income is also buoyed up during recessions by smaller tax collections, since the U.S. graduated-tax system enables people to keep more as they make less.

Fuel Source. Since the level of personal income directly affects how much people buy, its resistance to recession supports purchasing power. In recessions, people frequently cut down on such big items as appliances and cars, but continue normal spending for other items; and recession or no, Americans have steadily stepped up their outlays for services. This feedback of personal income into the economy maintains jobs, tends to keep people working and, in turn, earning their personal income. Perhaps just as important, says Louis Paradiso, the Commerce Department's chief statistician, "it creates confidence that the economy will not drift down too far."

When the economy begins to turn around, as it is doing now, a high level of personal income takes on new power: it is one of the chief factors in fueling a new boom.

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